France Ready to Cancel Russia Ship Sale

BPC Dixmude, a Mistral Class Amphibious Assault Ship built at STX Europe

By Gregory Viscusi and Helene Fouquet

July 22 (Bloomberg) — French President Francois Hollande said he’s prepared to cancel the sale of a second Mistral helicopter carrier ship to Russia if the European Union decides to expand its sanctions against Russia.

The second ship, due in 2016, hasn’t yet been paid for, making it possible to withhold the sale if the EU agrees to broaden its measures on Russia, Hollande said yesterday at the annual presidential press dinner.

At the same time, sanctions can’t be retroactive and wouldn’t cover delivery of the Vladivostok, the first Mistral warship, which is already paid for and due for delivery in October, Hollande said.

“Can the rest of the contract be honored?” Hollande told reporters in Paris about the second warship part of a contract with Russia. “That will depend on Russia’s attitude.”

EU foreign ministers are meeting today in Brussels to consider further sanctions punishing Russia in light of evidence that separatists in eastern Ukraine shot down a Malaysian airliner last week with 298 passengers on board. The sanctions described by Hollande would need to be decided at the level of national leaders, so no such decision would come today.

The U.S. and European countries have pressured France to delay or cancel the delivery of the Mistral ships after Russian annexed the Crimea and was accused of fomenting separatist uprisings in eastern Ukraine.

Company Sanctions

“With so many European Union citizens lost in the Malaysian Airlines crash, it is hard to see how the French Mistral deal can go ahead,” Timothy Ash, head of emerging markets research at Standard Bank Plc in London, said in an e- mail before Hollande made his remarks. “The British seem prepared to stomach enhanced financial sector sanctions, which the French had argued that they had to see before pulling the Mistral deal.”

The EU has already imposed what are known as Level 2 sanctions, which target specific persons and companies, because of Russian support for Ukrainian separatists.

A further step — which has been the source of dispute within the EU — would be Level 3 sanctions that apply to entire economic sectors such as the defense, banking and energy industries. While hitting Russia harder, those measures would also have a greater cost to the European nations.

The Mistral is a 200-meter (656-foot) ship, capable of carrying as many as 700 combat troops, 16 helicopters and 60 armored vehicles. It is built by state-owned military contractor DCNS and the shipbuilder STX in Saint-Nazaire, where 400 Russian sailors arrived last month to train on the Vladivostok.

Russian Deputy Prime Minister Dmitry Rogozin was quoted yesterday by the Russia’s Itar-Tass news agency as saying that he doubted France would break the Mistral contract.

“Billions of euros are involved,” he said, according to the state-owned news agency. “The French are very pragmatic.”

Russia is buying the Mistrals with French equipment, including combat navigation devices, and will arm them with its own weaponry, according to Itar-Tass.

–With assistance from Indira A.R. Lakshmanan in Washington.

Copyright 2014 Bloomberg.